How to Calculate your own EMI?

By- Dr. Abhijit Kar Gupta (kg.abhi@gmail.com)

How to calculate your own EMI

Suppose, your loan amount (principal) from a Bank = A0 , the yearly interest rate = i % and you pay an
installment amount (EMI) = B, every month.

Let us assume that the mode of interest calculation is compound and the interest is calculated once in
every month.

[Note: EMI = Equated Monthly Installment is settled over a period of your total term assuming the
interest rate may vary in this period.]

At the end of 1st month, the balance amount becomes (after you pay your first EMI):

A1= A 0 ( 1+ a )−B , (1)

i
where a=
100 × 12

At the end of 2nd and 3rd months, the balance amounts become:

A2= A 1 ( 1+a )−B= A 0 ( 1+a )2 −B [ ( 1+a )+1 ] (2) and

A3 =A 2 ( 1+a )−B= A 0 ( 1+a )3−B [ ( 1+ a )2+ (1+ a ) +1 ] (3)

And so on…

So at the end of any n -th month, you have the balance amount still to be paid:

An =A 0 (1+ a )n−B [ ( 1+a )n−1 + ( 1+a )n−2 +…+1 ] (4)

If after n -th month, the loan is fully repaid and the balance is thus zero, we can write, An =0.

Therefore, from (4) we can calculate the monthly payable installment amount:

A 0 ( 1+a )n A 0 (1+ a )n A0 ( 1+ a )n a
B= = = . (5)
[ ( 1+a )n−1 + ( 1+a )n−2 +…+ 1 ] [ ( 1+ a )n−1 ] /[ ( 1+a )−1 ] [ ( 1+ a )n−1 ]
[Note: Here the sum rule for a Geometric progression is used in the above ]

Thus we can calculate the monthly payable installment (EMI) by the following formula:

A0 ( 1+a )n a
EMI =
[ ( 1+a )n−1 ]

1
How to Calculate your own EMI?
By- Dr. Abhijit Kar Gupta (kg.abhi@gmail.com)

It is difficult to calculate the EMI from the above formula by a hand calculator and you would do better
to use a computer. However, you can approximate this by the following.

Now if a ≪ 1 (too small compared to 1), we can approximate

n n( n−1) 2
( 1+a ) ≈ 1+an+ a [Binomial expansion]
2

So, the expression for approximate EMI becomes

n(n−1) 2 n ( n−1 ) 2
A 0 (1+an+ a ) a A 0 [1+ an+ a]
2 2
B≈ = (6)
n( n−1) 2 (n−1)
1+an+ a −1 n[1+ a]
2 2

The formula (6) can be used for approx. calculation of EMI using a hand calculator.

Note that this is the EMI you can set for a period of n -installments (total number of installments over
your entire loan period). For example, if you take a loan over a period of 10 years, n=12× 10=120 ; for
15 years, it is n=12× 15=180 etc.

Example and reality check:

Initial loan amount, A0 =Rs .100,000 (One lac), loan is taken for 10 years, that means n=120 monthly
installments.

Yearly (fixed) interest rate, i = 10%

10
∴ a= =1 /120 ≅ 0.0083
100 × 12

Installment amount (EMI), B= Rs. 1321.51 as calculated exactly by formula (5). This comes to be Rs.
1390.44 by approximate formula (6).

Caution:

This above calculated value will not usually match with that provided by your Bank. Why? That is
because they calculate some kind of average EMI assuming the probable change in your interest rate
over the long period of loan. But there is nothing to worry about. Just check if the Bank EMI is not much
different compared to that you calculate by the formula (5) or (6).

Even if the Bank EMI is different than your calculation, there is nothing to worry about. You only have to
check if the balance amount goes down (every month or so) following the same algorithm as stated in
(1), (2) or (3)…

How to check?

2
How to Calculate your own EMI?
By- Dr. Abhijit Kar Gupta (kg.abhi@gmail.com)

To check how the balance amount comes down, you can calculate by yourself by the iterative way
following (1), (2)….

Else you can write a small program in computer to check this. If you pay more EMI than that is required
by your calculation, then the balance amount goes down to zero a little early. In case you pay less Emi
than required, it takes longer time for the balance amount to go down to zero. In any case the loan will
continue as long as the balance amount does not go to zero (or nearly zero) and then you pay the extra
little (residual amount) to close your loan account. This is the story in short!

Computer Calculations:

If you feed the steps (1), (2)…iteratively in your computer (through a few lines program), you get the
results easily.

Suppose, you setn=120, that is you take a loan for a period of 10 years, your EMI = Rs. 1321.5073 (to
be exact).

So, you can check through computer (or by a hand calculator), in case your bank set your EMI= Rs. 1321,
at the end of 120 installments your balance amount will be around Rs. 104 and you just have to pay this
extra to close your account. In this way you end up paying a sum total of Rs. 158,624 over the entire
period to the bank for a loan of Rs. 100,000.

In case you set EMI more (or less) than the above , you may have to pay something less (or more) than
the above total amount in the entire period!

Remember, what you pay all total in the entire period = EMI ×(No. of installments) + the residual
amount at the end.

If you follow the following two graphs, the above statements will be clear. Everyone would want to pay
less in aggregate over the entire period. But for that you have to pay a higher EMI and that will also not
be wanted. So for an optimum burden, you set somewhere in between.

Remember, lesser the EMI, longer the period of loan repayment which means you end up paying larger
total amount over the entire period.

In the following two figures we present here two quantities: Total amount to be paid in the entire period
(in Rs.) and the Total time taken (total number of installments) both with the predetermined EMI (in
Rs.). The calculation is done for a loan of Rs. 100,000 (1 Lac) and the fixed interest yearly interest rate of
10%. It is clearly seen that in both the cases they fall down with the increase of EMI amount and the
graphs show how. So we actually gain by setting a higher EMI. However, this depends on the load we
wish to bear every month!

Note:

3
How to Calculate your own EMI?
By- Dr. Abhijit Kar Gupta (kg.abhi@gmail.com)

 In practice, as the interest rates are floating (and the interest rate is also reviewed even for fixed
case), the calculation will change. But we can always start from that point (when the interest
rate changes) and follow the same rules.
 In case the EMI payment is stopped intermittently a few times (defaulter case), the burden
keeps rising, as the compound interest makes balance amount rise high enough and finally we
end up losing more money in the long run (the bank gains anyway)!

Fig.1

4
How to Calculate your own EMI?
By- Dr. Abhijit Kar Gupta (kg.abhi@gmail.com)

Fig.2

Few more points:

In some banks interest calculation is done every day (as for example SBI, as recently proposed). This
does not make much difference as far as they put the correct figures in the mathematical steps. If the
i
interest rate is the same as before and they consider a= [one year = 365 days], then the
100 × 365
30
equation (1) is written as A1= A 0 (1+a) −B and so on (assuming 30 days a month). Interest is
calculated daily and that is being done for 30 days or so (= one month) at a stretch and then the EMI = B
is subtracted at the end of the month. In this way, the calculation does not differ appreciably. Only due
to difference in assumption in some values of the kind: one year = 30 ×12 = 360 days or one month =
31 days or 29 days etc. would bring some slight change in the values.
For example, if we assume one year = 365 days, then the daily basis calculation shows that we have to
pay around Rs. 1100 less in over 10 years for the loan of Rs. 10, 0000 with 10% yearly interest rate. And
we have to pay around Rs. 500 more in case we assume one year = 30 ×12 = 360 days. But definitely
these are not significant differences over a period of 10 years!

Only fundamental thing to consider is the interest rate in case of money lending. People are often
initially attracted by the low EMI to be paid to the bank. This soothes you instantly. However, that will

5
How to Calculate your own EMI?
By- Dr. Abhijit Kar Gupta (kg.abhi@gmail.com)

take you longer time to repay the loan (loan period increases) and you end up paying more money to
the bank over the entire period.

Comparison between Simple Interest and Compound Interest:

Often you may simplemindedly believe that the simple interest is better for you over compound
interest. This is just the opposite! Many local cooperatives or local private banks or local money lenders
would resort to this mode of lending. What they do is that they first calculate the total interest over the
loan amount (principal) for the entire projected period and then add this with the principal amount.
Then they divide it equally by the total number of months over the period. There are a few variations of
this. But essentially they are same.
The commonly held idea is due to the fact that in compound interest it is the interest over the
interested that is repeatedly imposed. But we should not forget that we periodically submit the EMI
amount which reduced the balance over which the interest would be calculated next.
The simple interest rate is better when the EMI that is fixed for compound interest is low or in case
when there are repeated defaulter cases!
The comparison between the two modes of interest calculations is demonstrated in the following graph
(Fig.3). The parallel line indicates the amount of total money you pay when we opt for simple interest.
The zig-zag curve is to demonstrate how the total payable money can vary with the amount of EMI when
you miss to pay a couple of installments.

Important points:
 Compound Interest is better than simple interest (for a fixed interest rate)
 Fixing a higher EMI (for compound interest) is good for you in the long run.

6
How to Calculate your own EMI?
By- Dr. Abhijit Kar Gupta (kg.abhi@gmail.com)

Fig.3

=============